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By: Sir Henry Olujimi Boyo (Les Leba), first published in May 2005


The articles republished in the last two weeks addressed questions about the state of the Nigerian economy from keen readers of the Rational Perspectives column. Although both articles (“Economic Renewal: Questions & Answers” and“The Reality of Economic & Monetary Policies”) were published over a decade ago, they echo solutions to our current realities and can be found using the link below.

Today’s article is a 4-part series titled “Dollar Certificates Will Banish Chronic Poverty and Enhance Efficient Resource Allocation! (1)”. It discusses the advantages of adopting dollar certificates for dollar derived revenue instead of converting this revenue to Naira for the payment of statutory allocations. As you read on, keep in mind that although the rates discussed in today’s article have worsened drastically since its initial release 16 years ago, the solutions discussed in this article remain applicable. The current rates for buying and selling are N480/N485 to $1.

(This article can be found on the Daily Independent website and the Late Sir HenryOlujimi Boyo’s web portal, www.betternaijanow.com)

Federal revenue is currently derived from two main sources. The first and most obvious is Naira revenue derived from VAT and other government taxes, rates and other such fees. The second source of federal revenue is the dollar revenue derived from the sale of our crude oil. At present, the dollar revenue accounts for almost 85 per cent of the total federal revenue. However, the constitutional beneficiaries of the federation pool, i.e., federal, state, local governments and federal parastatals all receive their monthly allocations (comprising the Naira and dollar derived incomes) totally in Naira. This implies that the dollar component of the total revenue has been changed (by a government agency) to a Naira value before the total sum is disbursed. The Central Bank of Nigeria, presumably, unilaterally changes the dollar component at a rate that is unilaterally determined by the CBN itself. Readers should note that the rate adopted by the CBN could vary by over 25 per cent from the DAS rate! In other words, a rate of about N100 – N110 is currently adopted for changing the dollar revenue, not minding that the same CBN goes on to sell the same dollars at a premium rate of over N133 to the dollar at the Dutch Auction market, that is with an inherent profit margin of over 25 per cent. It is not clear into which account this forex profit is deposited and how the funds are subsequently appropriated remains hazy! What is clear, however, is that all dollar purchases at DAS carry an undeclared tax of over 25 per cent, which would in no small way instigate a higher general price level, since most of our raw materials and consumer goods are imported with dollars purchased at DAS! The additional VAT of 5 per cent paid on the imports further compounds the inflationary spiral.

Alarming as the above may seem, an evaluation of the impact of these ‘hidden’ taxes on the economy, in general, will not be the focus of our attention this week; rather we will briefly comment on the disruptive effect, the CBN’s unilateral conversion of the dollar revenue has on the economic framework.

Disruptive Effects of CBN’s Unilateral Conversion of Dollar Revenue

The component of dollar revenue to be disbursed monthly from the federal pool is currently over about $1bn. As you can imagine, this means that the CBN has to gather together the Naira equivalent of $1bn. There is, however, no standing idle pool of Naira from which this sum can be sucked, so the CBN employs a combination of three ways to consolidate the Naira sum; these ways include: borrowing its own money back from the banks with an interest burden, (sale of Treasury bills), sales of dollars at the DAS, and the ultimate source of ways and means (i.e., printing more Naira notes). The problem is that all the above sources of finding the Naira equivalent of the $1bn to be shared will catalyze an inflationary trend which is not healthy for the economy. The distortions of high-interest rates, low exchange rates, diminishing capacity utilization, unemployment, insecurity and deep-seated corruption in the land are all predicated on this faulty mechanism of infusing the foreign exchange earnings into the domestic economy. In other words, until we change the obtuse framework, we will continue to experience rising pump prices of fuel when crude oil prices rise; we will continue to have interest rates at an unhealthy level of over 20 per cent; we will continue to have against universal expectation, a weaker Naira even when our foreign dollar reserves attain all-time high levels. Indeed, we will continue to be poorer the more money we earn – a veritable anomaly.

Why then, one would ask does the CBN maintain such a defective monetary framework which constantly pitches a deluge of Naira to chase the limited dollar amounts auctioned every week. The answer appears to revolve more around a tradition of doing things rather than on any valid or thoroughly evaluated set of principles. Since the conversion of the 85 per cent dollar component of revenue to Naira causes so much bellyache in the system, what would happen if the dollar component was not unilaterally converted, but become infused into the system in a liberalised framework? In other words, what would happen if the CBN’s monopoly of the foreign exchange market was broken? This in effect would imply the issuance of dollar certificates in place of Naira warrants to all constitutional beneficiaries of the federation pool for the component of the federal revenue that is earned in dollars. The Naira income from VAT etc. which are locally derived would continue to be paid as at present with Naira warrants.

Merits of Dollar Certificates

The major effects of this reversal would be as follows: first of all, the perennial problem of searching for Naira cover for the over $1bn dollars to be shared every month would be over! All the catalytic inflationary push of having too much Naira (excess liquidity) in the system would be summarily halted.

In this event, the CBN does not have to borrow back government’s funds in the banking system with Treasure bills with an attendant interest burden of over N300bn annually on all Nigerians; consequently, the CBN can reduce its Minimum Rediscount Rate (MRR-the CBN’s base rate to commercial banks) to below 5 per cent! The commercial bank lending rates would fall to about 9 per cent or single-digit as expressly desired as acceptable and progressive and stimulating for the growth and consolidation of industrial enterprise by no less a person than President Obasanjo himself. The level of employment would be expected to climb rapidly and the national income base would be largely expanded. Insecurity in the land would be drastically curbed when more of our jobless youths begin to find worthwhile employment.

Furthermore, if large Naira waves in the banking system, resulting from the payment of allocations totally in Naira to beneficiaries of the federation pool disappear, the Naira in the banking system would become more compact and create a framework where there would be more dollar certificates (held by all constitutional beneficiaries) chasing the existing volume of Naira in the system at any one time. This can only mean a better valued Naira vis-à-vis the dollar. A Naira value of N10 – N20/$ should become feasible if the Purchasing Parity Principle and our relatively improved external dollar reserves (covering over 20-month imports bill) are considered. For example, it is possible to have a basic nutritious meal of dodo and beans with N100 (one hundred Naira) in most parts of Nigeria, but it is not possible to have a hamburger and chips for $1 (i.e., N133) in any part of Europe or America; you will need $6-$10 for such a meal. This is the essence of the Purchasing Parity Principle in the determination of relative foreign exchange rates between nations. This universally applied principle has obviously been jettisoned in the Nigerian scheme of things to the great distress of our people.

More Merits of Issuance of Dollar Certificates

The adoption of dollar certificates for dollar derived revenue in place of converted and compounded Naira revenue for the payment of statutory allocations would yield the following additional benefits:

i. Instantly eliminate excess liquidity

ii. Produce truly market-fixed single exchange rate and stable prices

iii. Produce a strong and stable Naira with the prospect of the exchange rate firming up to about N20-N50/$ within four-six months

iv. Permit production-friendly low-interest rate of about five per cent that is comparable to what obtains in developed countries and our trading partners thereby boosting local output of various goods and services

v. Facilitate streamlined tariffs regime that keeps local industry churning thereby guaranteeing high employment

vi. Ensure evasion-proof tariffs thereby sanitizing customs/ports receipts as well as reduce willful delays

vii. Deal smuggling a death blow by blocking avenues for funding such activities

viii. Force the CBN to conserve and build up the foreign exchange and also earn maximum interest on same instead of CBN prematurely releasing foreign exchange to local banks and their foreign correspondent banks with attendant (1) loss of accruable interest and (2) offering of leeway for diversion of foreign exchange to fund round-tripping, the black market, capital flight, private foreign account, etc.

ix. Engender automatic transparency by knocking out dark corners which harbour systemic corruption

x. Bathe Nigeria in self-confidence and unleash her excellent growth potential to the great glory of the black race!

xi. Throw up the true level of budgetary deficit expenditure

xii. Attract abundant direct foreign investment, given the ensuing conducive environment, which would help swell available foreign exchange and engender effortless servicing and eventual offsetting of Nigeria’s foreign debt. The above list is not exhaustive, but what is clear is that the proposed framework which accommodates the adoption of payment of dollar derived revenue with the instrument of dollar certificates is a realistic and practical way to get our people out of the poverty trap and enhance a more efficient resource allocation system in our economy. This is no doubt a more superior framework by far than the current system that ensures that we remain poorer even when we work harder and earn more!

Save the Naira, Save Nigeria!